Joint United Nations Development Programme / World Sank. Energy Sector Management Assistance Programme. Natural Gas Upstream Policy

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1 Joint United Nations Development Programme / World Sank :lm ESMAP Energy Sector Management Assistance Programme Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Poland Natural Gas Upstream Policy Report No. 206/98 August 1998 Polska Polityka w zakresie gazu ziemnego Raport 206/98 Sierpien 1998

2 JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDPNWorld Bank Energy Sector Management Assistance Programme (ESMAP) is a special global technical assistance program run as part of the World Bank's Energy, Mining and Telecommunications Department. ESMAP provides advice to governments on sustainable energy development. Established with the support of UNDP and bilateral official donors in 1983, it focuses on the role of energy in the development process with the objective of contributing to poverty alleviation, improving living conditions and preserving the environment in developing countries and transition economies. ESMAP centers its interventions on three priority areas: sector reform and restructuring; access to modern energy for the poorest; and promotion of sustainable energy practices. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG) composed of representatives of the UNDP and World Bank, other donors, and development experts from regions benefiting from ESMAP's assistance. The ESMAP CG is chaired by a World Bank Vice President, and advised by a Technical Advisory Group (TAG) of four independent energy experts that reviews the Programme's strategic agenda, its work plan, and its achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank to conduct its activities under the guidance of the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported over the years by the World Bank, the UNDP and other United Nations agencies, the European Union, the Organization of American States (OAS), the Latin American Energy Organization (OLADE), and public and private donors from countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States of America. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information, a copy of the ESMAP Annual Report, or copies of project reports, contact: ESMAP c/o Energy, Mining and Telecommunications Department The World Bank 1818 H Street, NW Washington, DC U.S.A.

3 Part l: English Version Poland Natural Gas Upstream P'olicy August 1998 Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) Oil and Gas Unit of the Energy, Mining and Telecommunications Department and Energy Sector Department of the Europe and Central Asia Region The World Bank

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5 Contents Part 1: English Version Acknowledgments vii Abbreviations and Acronyms... viii Units of Measure... ix Executive Summary... 1 Introduction... 1 Geological Prospectivity of Poland for Natural Gas... 1 A Joint Venture Strategy for Exploration in PGNiG Areas... 2 Fiscal Policies and Incentives Producer Pricing Framework Land System for Exploration and Production... 6 Features of a Modem Joint Venture Agreement... 7 Next Steps Background... 9 A. Institutional Arrangements... 9 B. European Union Accession C. Natural Gas Supply and Demand D. Natural Gas Prices and Values E. Downstream Infrastructure Investments Prospectivity of Poland for Natural Gas A. Geological Regions B. Exploration Operations C. Reserves and Production D. Future Potential Concession and Licensing Arrangements A. Mineral Development Rights iii

6 B. Concessions and Licenses C. Comparison of International Concession Terms Upstream Fiscal and Land Policies A. The Fiscal Terms Features of the Present Fiscal Terms Comments on the Fiscal Terms Comments on the Individual Tax Items B. Land System for Oil and Gas Exploration and Production in Poland Comments on the Land System The Joint Venture Framework for Exploration A. The Joint Venture Approach B. Costs and Benefits of an Accelerated Exploration Program Feasibility of Joint Venture Operations Costs and Benefits of Accelerated Exploration C. Features of Joint Venture Agreement Annex: Technical and Economic Data Tables 1: Benefits of Accelerated Exploration : Gas Demand Forecasts-Low Scenario : PGNiG Gas Supply Forecasts : Planned Investments to : Oil and Gas Reserves and Production in Poland : Oil and Gas Future Potential by Region : Cost of W ells A1.1: Poland End User Fuel Prices, January A1.2: Oil and Gas Potential by Geological Region A1.3: A Comparison of Features of Oil and Gas Concession Terms for Some Countries A1.4: Framework for a Joint Operating Agreement A1.5: Yardsticks for Profitability and Risk Analysis Figure 2.1: Upstream Oil and Gas Trends in Poland ( ) iv

7 Part II: Polish Version (Follows page 60 of the English version) List of Completed Activities (Follows page 62 of the Polish version) Maps 1 Gas Transmission System of Poland 2 Major Geological Structures of Poland 3 Oil and Gas Bearing Regions of Poland 4 Oil and Gas Concession Map of Poland v

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9 Acknowledgmenits This report is based on the findings of an ESMAP[World Bank gas sector mission to Poland in November Members of the mission were Peter Law (Senior Energy Specialist and Task Manager), Julius Wilberg (Senior Financial Analyst), Arinze Agbim (Petroleum Specialist) and Pedro Van Meurs (Consultant). The mission wishes to express its appreciation for the good co-operation of the staff of the Department of Geology of the MoEPNRF, the Ministry of Finance, PGNiG, and the Geological Institute of Poland. vii

10 Abbreviations and Acronyms BMB ECT EMV ERA EU JV JOA PGNiG S.A. PGN S.A. PGAZ S.A. PLN MoEPNRF MSR NEI NPV ROR GiT Barnowko-Mostno-Buszewo Field Energy Charter Treaty expected monetary value Energy Regulatory Agency European Union joint venture joint operating agreement Polskie Gornictwo Naftowe Gazownictwo S.A. Polskie Gornictwo Naftowe S.A. Polskie Gazownictwo S.A. Polish zloty Ministry of Environmental Protection, Natural Resources and Forestry maximum sustainable risk net exploration investment net present value rate of return government take viii

11 Units of Measure CFD MMCFD CM CMD MMCMD CMY MMCMY BCM BCMY BCF TCF BTU MMBTU TOE MMTOE MMT MMTY GWh kwh TWh GW kw MW kv km sq. km kcal kg bbl cubic feet per day million CFD cubic meter cubic meter per day million CMD cubic meter per year million CMY billion cubic meter billion cubic meter per year billion cubic feet trillion cubic feet British thermal unit million BTU ton of oil equivalent million TOE million tonnes million tons per year gigawatt hour kilowatt hour terawatt hour gigawatt kilowatt megawatt kilovolt kilometer square kilometer kilocalorie kilogram barrel ix

12 Executive Summary Introduction 1. During 1996, the World Bank prepared a diagnosis of the gas sector in Poland, resulting in a gas sector policy note which made recommendations aimed at increasing private participation in the sector through the rationalization of gas competition policy, gas pricing policy, and gas exploration and production policy. Before 1996, progress in signing exploration concession agreements with foreign investors had been disappointing, bearing in mind that acreages were opened to foreign investment in 1992 with two subsequent international bidding rounds. Since 1996 there has been better progress and concession agreements have been signed with international oil companies including Medusa, Texaco, El Paso, Apache, RWE, FX Energy and Cal Energy. 2. The gas sector policy note recommended that the gas upstream fiscal policies and incentives should be revisited, with a view to streamlining the procedure for negotiating concession agreements and enhancing the prospects for private investments. The present study is in response to this, and was carried out with the Department of Geology (former Department of Geology and Geological Concessions) as main counterpart, with substantial cooperation from the Polish Oil and Gas (Company(PGNiG S.A.). The objectives of this study were to provide advice which could lead to increased levels of private investment in exploration and production for oil and gas, focusing specifically on: (i) joint venture or other arrangements which could lead to accelerated exploration, (ii) upstream fiscal, land allocation and gas pricing systerns, and (iii) exploration and production concession models in the light of international experience. Geological Prospectivity of Poland for Natural Gais 3. Some 80% of the total land area of Poland is considered prospective, with future potential of 72 MMT and 608 BCM of recoverable oil and gas reserves'. This is divided in two regions: (a) the area 2 reserved for exploration and production by PGNiG, (b) the remaining area which is open for direct international exploration and production. In addition, Petrobaltic has some acreage in the Baltic sea3. i Polish Petroleum Institute estimates. 2 Includes the Flysch Carpathians, the Carpathian Foredeep, and part of the Fore-Sudetic Monocline. 3 There is an offshore economic zone of 33,000 sq kilometer. 1

13 2 Poland: Natural Gas Upstream Policy 4. The area reserved for PGNiG is by far the most attractive for further exploration, considering the proven oil and gas potential, the low geological risk, and the remaining possibilities for quite large oil (up to 10 MMT) and gas fields (up to 30 BCM). The Mid Polish Anticlinorium near the Baltic shores is also prospective. The area open for international competition is less attractive, because prospects are either very deep or the geological risk is high. Exploration in this area would concentrate on some higher risk possibilities for large fields. 5. Overall, the level of exploration and field development is low considering there are still sizable reserves to be discovered and developed, as exemplified by the recent discovery of the Barnowko-Mostno-Buszewo (BMB) field in Western Poland by PGNiG. A Joint Venture Strategy for Exploration in PGNiG Areas 6. Current natural gas production by PGNiG is about 4 BCMY with about 6 BCMY imported from the Russia. The demand for gas in Poland is forecast to increase to at least 20 BCMY over the next decade with an increasing dependence on gas imports. A strategy which leads to accelerated exploitation of oil and gas resources in PGNiG's designated areas could therefore be beneficial to Poland and PGNiG, by reducing the need for imports and improving the cashflow of the company. 7. The current World Bank Energy Resource Development Project has helped PGNiG to add 30 BCM of proven reserves to its natural gas resource base over the last six years, even though it is not an exploration project. If new projects focus on an accelerated exploration program, adding at least this amount again over a 10 year timeframe is a conservative assumption. A strategy for achieving an accelerated exploration program can be for PGNiG to enter into joint venture arrangements with independent oil companies, to exploit those areas reserved for PGNiG within the framework of concessions held by PGNiG. This could strengthen the cashflow of PGNiG without having to incur any exploration risk. 8. The joint venture strategy would be attractive to independent oil companies. Targets to be discovered of similar characteristics to BMB show good financial viability, with non-risked rates of return in excess of 25%, and these projects could sustain a high geological risk (or a probability of success as low as 2.5%). However, many investors would consider the probability of a BMB type discovery to be better than this, since the Permian formations (in which the BMB field was discovered) occur with similar characteristics over a large area. Therefore, exploration blocks containing possibilities for BMB type targets would be attractive to independent oil companies as joint ventures. Such joint ventures could be structured so that the independent oil company takes the full exploration risk, with PGNiG taking a working interest of 25% to 40% after the declaration of a commercial discovery.

14 Executive Summary 3 9. The costs and benefits of an accelerated exploration program under a joint venture strategy are inherently uncertain. However, making a reasonable assumption that two BMB type targets could be discovered and developed 4 in PGNiG reserved areas and brought forward by 5 or 10 years, would result in the benefits shown in Table 1. This shows that an accelerated program which allows the development to be started today gives an NPV of US$ 522 million, compared to a 10 year delay which results in an NPV of US$ 86 million. The difference of US$ 436 million represents a substantial benefit to project, which would be shared between the JV partners. Similar benefits accrue from the earlier collection of royalties and taxes. However, these benefits do not include the full exploration costs which might be incurred by the Joint Venture partner, as these would have to reflect the geological risk is not quantified in this study. Inclusion of such costs would to some extent reduce the NPV's shown in Table 1. Table 1: Benefits of Accelerated Exploration (non-risked development of 2 BMB type targets) Exploration timing Now Delay 5 yr Delay 10 yr NPV of Project (US$ million) NPV Royalties & Taxes (US$ million) The development of two BMB type targets would generate gross undiscounted revenues of US$7.8 billion from oil and gas sales over the field lifetime, which would offset Poland's requirement for imports. For PGNiG, a key benefit of the joint venture approach would be the international exposure (including management, technical and language training) which could be offered by the joint venture partner in his home country, and for which provision should be included within any joint venture agreement. 11. PGNiG owns many marginal shut in gas fields, which show rates of return of 10% or less at producer gas prices in line with gas import prices (2.7 US$/MMBTU). Development of these fields is not financially viable, except where most development wells have already been drilled and are sunk costs. In such circumstances, marginal fields may be of interest to small private oil and gas companies., and PGNiG may wish to sell their exclusive production rights for cash plus a small overriding royalty. Fiscal Policies and Incentives 12. The fiscal terms offered in Poland are important in attracting independent companies for exploration and development both insicle the PGNiG-reserved areas (through JV' s) and outside these areas. The current fiscal terms are rated as very 4 This would yield 22 MMT of recoverable oil and 20 BCM of recoverable gas.

15 4 Poland: Natural Gas Upstream Policy favorable on a world wide basis. The government take (royalty plus tax) is 44%, which will reduce when corporation tax is lowered from its present level of 38% to 32% by This will make the fiscal system among the most favorable in Europe. Corporate income tax in Poland is creditable for corporate income tax purposes in the U.S., Canada, the U.K. and other developed countries, and so there should not be any negative double taxation effects. The withholding taxes are also creditable. The royalty will typically be a deductible item for tax credit purposes in the respective home countries of the various investors. 13. The mission's analysis concludes that a major restructuring of the fiscal incentive package will not result in higher levels of exploration in Poland, but the fiscal system may be streamlined as follows: (i) The mining usufruct fee is unnecessarily complex, and adds to negotiations prior to issuing the exploitation concession. It would be simpler to include in the Mining Usufruct Agreement a fixed annual payment (e.g. 0.5% or 1% of the value of the production). However, the mining usufruct fee based on reserves is a traditional payment in Poland. An alternative would be to simply determine the value on the basis of a small amount per barrel of oil equivalent of proved recoverable reserves. This would eliminate the need to agree on the value of reserves. (ii) The current method of determining royalties on the basis of the cost of the production plus a profit margin is not accepted international practice. Now Poland is inviting foreign investors, it is necessary to introduce a standard procedure with the royalty based on the deemed market value at the field gate. The deemed market value can be determined by establishing the market value at an agreed point in Poland and deducting transport costs from the field gate to this determination point. Also adjustments need to be made in order to account for quality differentials for oil and gas. (iii) Currently the royalty is set by regulation, which would permit the government to unilaterally change the rate of royalties, thereby exposing the investor to fiscal risk in case of a significant discovery. Consideration should be given to introduce the royalty as an item in the Mining Usufruct Agreement, where changes in royalty rates would only apply to new Mining Usufruct Agreements. Alternatively the royalty could also be determined in the Geological and Mining Law. (iv) A simplification of the VAT system permitting refunds where the input VAT exceeds the output VAT is recommended. For instance, the sale of well information or scrap metal during an exploration operation should not result in a situation where an oil company loses rights to refunds. (v) It is not beneficial for Poland to increase the cost of exploration and field development through import duties. The small size and low well productivities of most fields already results in a situation where many fields are marginal. On the contrary, cost reduction through reducing these tariffs where possible is desirable.

16 Executive Summary 5 (vi) The corporate income tax provisions are generally adequate, but some adjustments would be beneficial. The depreciation rate of 8.5% to 10%/ for oil and gas field facilities is low from an international perspective, and 12.5% is recommended. The rate of 4% for pipelines is also low and would be a slight disincentive for the further development of gas transmission; 5% or 6% is recommended. (vii) The depreciation rate of 4% on intangible drilling expenditures is much too low and it is recommended to make intangible drilling expenditures an expense which can be written off immediately in the year such costs are incurred. (viii) The three year loss carry forward for downstream o-perations is a severe restriction which is unfavorable and could hamper certain downstream operations. (ix) It is recommended to extend the 10 year loss carry forward provision, currently applicable to upstream operations, to all oil and gas operations, upstream and downstream. The 10 years is counted from the start of the concession which is not a common procedure. Usually, the tax loss carry forward is counted from the year in which the loss was incurred. Alternatively, a loss carry forward period of 7 years for all corporate activities (not just oil and gas) could be considered. Producer Pricing Framework 14. Currently, producer prices from PGNiG's upstream subsidiary companies are set on a cost plus basis. However, for a gas importing country such as Poland, it is economically efficient to link the price of gas in domestic producer sales contracts to its value in the market (market-based pricing). This is usually done by linking the end-user price of gas to the price of the main competing fuels, and subtracting (or netting back) transmission, distribution and storage costs. The resulting, producer price usually offers sufficient financial incentive for the producer to explore and develop new gas reserves. Since end-user gas prices 5 are 4 US$/MMBTU (industry) and 5.5 US$/MMBTU (residential), and the average cost of expanding Poland's gas infrastructure over the long term is estimated at 1.4 US$/MMBTU 6, then a maximum producer price broadly in line with the price of gas imports (2.7 US$/MMBTU) should be sustainable. The Ministry of Finance has indicated that there is no intention to fix producer prices, and producers will negotiate prices directly with large consumers and distribution companies, using the transport facilities of PGAZ or by constructing their own pipelines. This represents a market-based approach which is supported by the mission. 15. Gas prices to industry are now at economic levels, but prices to residential consumers (which represent more than 43% of PGNiG's gas market) have yet to rise by an estimated 35% reach parity with West European levels., As gas prices rise, the Energy Regulatory Agency (ERA) will be able to apportion more or less of the economic rent for 5 July 1997 prices. 6 Excludes depreciation of existing assets

17 6 Poland: Natural Gas Upstream Policy downstream operations (transmission, distribution and storage) depending on the investments required for these activities. Land System for Exploration and Production 16. Approval by Local Authorities for Exploitation: In Poland the municipalities are required to approve the granting of exploitation concessions. The investor is subject to considerable risk, since negative decisions caused by local political or other non-technical reasons can cause delays, which may greatly damage the modest interest in petroleum exploration and development in Poland. It would be better if a framework could be developed through regulations or otherwise that would detail the terms the local approval process and clearly establish the basis for possible disapproval by local authorities. 17. Surface Area: The surface area which is permitted for a single exploration concession (maximum 1,200 sq kilometer) and in particular for a combination of areas through a Mining Usufruct Agreement is very attractive by international standards. The possibility to combine several blocks in a single Mining Usufruct Area of 10,000 sq kilometer or more gives investors access to very large exploration areas. The government may consider the introduction of "Quarter Blocks" which would be 1/4 of the current standard blocks, and the introduction of relinquishment provisions after the first exploration period of three years. 18. Time Periods: The time periods of 6 years for exploration and 30 years for exploitation are in line with international practice. The ability to continue to explore during the exploitation concession is an attractive and appropriate provision which encourages the exploration under high risk circumstances. The government may wish to define this right in more detail in the model Mining Usufruct Agreement. 19. Work Conunitments: The work commitments included in the Model Mining Usufruct Agreement are generous in relation to the possible size of the exploration areas. The govemment may wish to insist in the near future on a higher level of exploration intensity than the one well commitment during the first three years on a per block basis. 20. Some countries (Argentina, Bolivia, Canada) have accelerated the process of determining work commitments through the concept of "work units". Work units have the advantage of leaving great flexibility to the explorers with respect to the details of their programs, while ensuring the government that substantive minimum work will be carried out. Given the high risk of most of the exploration in the open acreage, the government may consider the introduction of work units to attract the smaller oil companies to the smaller prospects. 21. Penalties for Non Fulfillment of Work: The Mining Usufruct Agreement does not specify what happens if the company does not carry out its commitments. The agreement should state that the government may cancel the agreement at the end of the first or second three year period in the case of non-compliance.

18 Executive Summary Access to Data: The Geological and Mining Law (1994) stipulates that geological data obtained as a result of the exploration and development activities remain the property of the companies on an indefinite basis. This is contrary to the practice in most countries which typically require such data to become non-confidential after a certain period of time or once the acreage is relinquished or the concession terminated. It is important to change this provision in the Law when there is opportunity to do so. 23. Access to the Surface: The underground oil and gas resources belong to Poland and private landowners cannot deny the State the right to benefit from this ownership. Given the intensive agricultural lands in Poland, it seems that cumbersome legal procedures to private land access are actually preventing the development of some gas fields. The government may wish to examine the extensive land surface access provisions that occur in areas with similar conditions, such as in Alberta. Alberta has developed an extensive system of land access provisions and has created specialized Boards which deal with these problems. These practices are now considered fair by the petroleum industry and the land owners, and the government may wish to introduce similar surface access regulations. Features of a Modern Joint Venture Agreement 24. The relationship between partners in a joint venture (JV) is most often defined by one or more agreements. These include a Participation Agreement to define the participation or working interests of the parties in the concessions, and an Operating or Joint Operating Agreement (JOA) to govern the relationship between the parties in the operation of the concessions: The framework for such agreements which can be appropriate for use by PGNiG are included within the annex. Next Steps 25. In addition to the implementing the recommendations noted above, the next steps would be to: (i) Prepare an economic review of PGNiG exploration acreage and prepare a detailed Joint Venture agreement incorporating the legal and economic parameters. Design a strategy for international bidding for such blocks. (ii) Draft specific procedures for the determination of royalties on oil and gas. (iii) Draft specific adjustments to depreciation regulations with respect to corporate income tax regarding intangible drilling costs and discuss in more detail the matter of loss carry forward with Ministry of Finance (iv) Draft a regulation on work units as an example for consideration. (v) Organize a workshop in Poland on surface access. Participants could be representatives of the petroleum industry and the agricultural sector. Resource persons could be experts on surface access from several countries.

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20 Background A. Institutional Arrangements 1.1 The policy objectives for the energy sector and for the state oil and gas company, PGNiG S.A., are determined by the Ministry of Economy. PGNiG is a single owner corporation whose shares belong to the Ministry of State T'reasury. Most matters relating to the exploitation of Poland's oil and gas resources are the responsibility of the Minister of Natural Environment Protection, Natural Resources ancl Forestry (MoEPNRF). These include the granting of concessions for the exploration and exploitation of natural gas. The Department of Geology is the body within the MoEPNRF, with responsibility for reviewing and advising the minister on all applications for concessions. The Minister of Finance is still responsible for setting energy prices and tariffs to final consumers. 1.2 The two key energy acts which regulate activities in the gas subsector are: (i) the Geological and Mining Law (approved in 1994), which sets out the principles and procedures for granting concessions for the exploration and production of oil and gas, and (ii) the Energy Law (approved in 1997), which sets out the principles for the development of competition in the energy sector including heat, electricity and gas. The Energy Law does not cover those matters of exploration and procluction dealt with under the Geological and Mining Law. 1.3 Key features required under the Energy Law are: (i) the obligation of energy enterprises whose business is transmission and distribution, to provide transmission services (open access) for domestic producers of natural gas, (ii) the provision for the creation of the Energy Sector Regulatory Agency (ERA) to oversee the development of competition in the sector, and (iii) tariffs for natural gas to be fixed by the Minister of Finance for a maximum of 2 years after the passage of the law, or until December PGNiG S.A. is the vertically integrated state oil and gas company and is currently the only producer of natural gas in Poland. A restructu:ring program for PGNiG was approved by the Council of Ministers on April 2nd, Stage 1 involved the transformation of PGNiG from a state enterprise to a corporation, PGNiG S.A., and was accomplished in September 1996 with the decision by the Council of Ministers to 9

21 10 Poland: Natural Gas Upstream Policy transform PGNiG into a single-person State Treasury company. Stage 2 involves the commercialization and privatization of thirteen non-core drilling and geophysical service companies, of which two have already been partly privatized. Stage 3 involves the formation of PGN S.A. to be responsible for upstream hydrocarbon prospecting and production, and PGAZ S.A. to be responsible for downstream activities including gas transmission and distribution, but no timetable has been established for this. B. European Union Accession 1.5 Poland is committed to integration with the European Union (EU) and is currently in the pre-accession phase. Full membership will require Poland to comply the EU's treaties, norms and regulations (known collectively as the acquis communautaire), although certain temporary derogations may be sought during preaccession negotiations. Full accession will require compliance with the obligations of the European Energy Charter signed by Poland in 1991, and the European Energy Charter Treaty signed by Poland in Three EU directives within the acquis have special significance for the Polish Gas sector which are: (i) The Hydrocarbon Licensing Directive; (ii) The Internal Market Directive; and (iii) The Gas Transit Directive. 1.6 The Hydrocarbon Licensing Directive (94/22/EC) aims to encourage the best possible prospection, exploration and production of hydrocarbons, whilst recognizing the sovereign rights of member states over hydrocarbon resources on their territories. It requires common rules to be set up to ensure that procedures for granting authorizations are open to all entities possessing the necessary capabilities, and that authorizations are awarded based upon objective published criteria. It also seeks to limit the area covered by and the duration of the authorization, to prevent the reservation to a single entity of an exclusive right over an area which can be prospected, explored and brought into production more efficiently by several entities. 1.7 With respect to the Internal Market in Natural Gas Directive, agreement was reached by the European Union energy ministers in May 1998, which commits EU members states to a gradual opening of the gas market starting with at least 20% of the total market, and progressively increasing to 33% over ten years. Eligible consumers will have rights of negotiated access to the transmission and distribution systems, LNG facilities and storage facilities, without discrimination and subject to available capacity and in return for a reasonable remuneration. Eligible consumers will consist of all power generators and large customers with a consumption threshold of 25 MMCMY, and this threshold will progressively decrease to 5 MMCMY by ten years after the directive comes into force. It also requires the member states to designate a competent authority which